A Tight Focus on Financing
By Vivek Wadhwa
Back in my days as a tech CEO, I raised $20 million at sky-high valuations during the Internet bubble. I was even able to raise more money afterwards, albeit at much lower valuations, to help save my company. No surprise, then, that my new partners in the movie business saw me as a natural candidate for what turns out to be one of the hardest jobs in the entertainment industry -- raising funds for speculative movie projects.
I went into this expecting that everything would be different in this new world and that it would be governed by a different set of rules. After all, no financial bubble existed in the entertainment industry. Therefore, fund-raising should have been easier than in the post-bubble tech industry, right? Well, I was completely wrong.
SURPLUS OF EXCUSES.
My new adventure started when former investment banker Brad Listermann asked for my help in connecting with potential investors. I have written in past columns that his plan was to produce movies in Bollywood for one-tenth the cost of a comparable independent Hollywood production. He needed to raise $1.3 million to produce his first movie.
The numbers made sense, providing for a huge financial upside if everything went well. Besides, compared to investments in boring tech companies, an investment in this movie would be fun and exciting. Investors might get a chance to hobnob with famous directors and movie stars. It had something, in that sense, no tech company investment would ever have -- real sex appeal, beyond just making money.
I introduced Brad to investors who had made millions during the dot-com bubble and routinely put money into promising ventures. One after another, they declined to invest. They gave him the same old excuses that every entrepreneur looking for funding seems to hear these days: their investment dollars are maxed out; the plan is great, but they are tied up with other investments; no time to review the paperwork. Next, I had him speak to wealthy doctors, real estate moguls, and money managers, but it seemed everyone was quoting the same list of excuses.
GET ME REWRITE.
Brad, who had helped others raise millions of dollars for less promising business plans, was as surprised as I was. Every road led to a dead end. He had spent months on this effort and had little to show. So we decided to regroup and go to Plan B. Even though this was an entertainment-industry project, we would do things the tech-industry way.
In the tech, you always build companies one step at a time. You start off with a vision to change the world, devise a plan, raise enough money to get started, build a prototype, raise more money, and keep doing this until, finally, you have something that customers actually need. Then you figure out how to market what you built.
Along the way, you keep selling your vision and getting people to believe and invest in you. It must have been a technologist who invented the stock option, a brilliant way of assigning a value to something that has great potential but, as yet, doesn't really exist.
I asked Brad to rethink the budget and plan. I wanted something that would cost much less and that could be funded in stages. I also asked him to apply his investment-banking experience to create a payout structure that looked more like the stock options we were used to. These would provide higher rewards to investors who came aboard earlier -- rewards commensurate with the higher risk.
The plan I had in mind would also have all participants in this venture get minimal pay up front, provide an incentive to be creative in cutting costs, and work hard in return for a share of the profits.
After weeks of research, analysis, and lengthy discussions with producers and directors in both Bollywood and Hollywood, we crafted a plan that allowed us to get things rolling for $125,000. We could then take many shortcuts and shoot the film in digital format for another $125,000 and be ready to market this to distributors at film festivals. Once the project had started, we would also be free to scale up the entire production and revise the plans.
With all the financial upside and Bollywood excitement, raising the first $125,000 would be easy right? Wrong again. This time I did the calling -- but I heard the same excuses. When I probed further, I learned that many propects had lost significant money in previous film-industry investments. This business has traditionally had questionable accounting practices and lacked financial discipline. Whenever potential investors called friends and business contacts to ask what others thought of a film investment, they heard horror stories.
And then I called a close friend, Gene Bedell, author of 3 Steps to Yes, the Gentle Art of Getting Your Way to see if I could get him to invest. His book talks about persuading people to do things by appealing to their personal needs. So, after understanding his needs, I had Brad offer to get Gene's son, Zach, a small role in the film, and have our families visit India together for the filming.
Gene, who has owned airplanes and Harley Davidson motorcycles, had just purchased a 200-acre farm in Virginia, so he was clearly not averse to spending money. He really wanted to do something special for his son, loved new adventures, and could easily afford an investment like this. So this should have been an easy sale.
"SKIN IN THE GAME."
But no, Gene had a different reason for declining the investment: It seemed too good to be true. Gene's words: "I'm not saying this is a scam, but as a writer with a writer's imagination but a businessman's real-world experience, it has the characteristics someone with an orientation like mine could take to be a scam." I had no idea how to respond to this objection.
Frustrated, I asked my wife, Tavinder, if we could take some of our modest savings and invest them in this venture. She knew how I had become emotionally attached to this project and said that she would support me in whatever I decided. So I told Brad to start the project, and I would get him the money one way or the other. I also decided to get much more involved with this venture myself.
Once the project had started, and this was more than a business plan, I called some friends to tell them I had taken the role of executive producer and was funding this project myself. In the info-tech business, venture capitalists call it "skin in the game." And they generally won't invest in a company unless the founder has not just sweat equity but some of his own cold, hard cash tied sunk into the venture.
MATTER OF TRUST.
Evidently, my willingness to take the risk convinced others to do so. I was so relieved when nearly every friend I called agreed to invest. This made me realize that, even though most people had lost interest in making investments for the sake of investment, they will take a chance on people they know and trust. Within a week, I had received commitments for $40,000 more than we needed to start up.
Things moved very fast after that. With the enthusiastic involvement of Duncan Clark, ex-Columbia Tri-Star International division president, and Hollywood director Richard Martini, we scaled up the targets, produced a world-class script (see BW Online, 2/17/04, "The Plot Thickens, Slowly"), recruited top players to help with the production, including well-known movie stars.
We also decided that we would produce a movie of the quality of My Big Fat Greek Wedding and Monsoon Wedding, and not take any shortcuts. Duncan asked that we triple the budget and produce something that he would feel comfortable with marketing to the leading worldwide distributors.
The new plan required us to raise an additional $400,000 for the production, and $300,000 for marketing. Marketing dollars should be easily obtained once the film had been completed and investors understand what they were betting on. But that still left the challenge of raising the $400,000. Duncan asked his partner, Doug Falconer, CEO of Pacific Media & Entertainment, to help dig it up.
Doug was also an ex-technology executive and a veteran of the entertainment industry. He was very well-respected and connected in the financial community, and he had been both the producer and executive producer on several films. He had raised tens of millions of dollars and was excited about our Bollywood project.
He felt that top investment groups would be very interested in this but had a concern that the amount we were looking for might be too small for their portfolios. He immediately contacted six entertainment-investment groups, and each expressed strong interest. They now needed to go through their normal due diligence and decision-making processes.
Having been through the venture-capital fund-raising process many times and knowing how long and difficult it can be, I was reluctant to bet everything on Doug's contacts. We agreed that we would have a dual-track process to complete this funding. I would seek private investors while Doug worked on venture capitalists, and the first one in line with a check for the full amount would win.
So, we put together new documents and plans, and a funding document that allowed for a maximum investment of $25,000 per accredited private investor. Even though we could have had a higher maximum, I didn't want anyone to take too much of a risk. After all, just in case something went wrong with our project, I still wanted to have some friends left in the world.
So I passed the word on, and arranged for Brad and his movie-star wife, Kashmira Shah, to visit us in North Carolina and discuss the investment. To my amazement, friends introduced me to other friends, and by the time of their visit, I had already received $300,000 of investment commitments. The word was out about this project and its goals. The Indian community saw this as a chance to educate and help change attitudes of the American public about South Asians, and my American friends loved the idea of investing in something so exotic and exciting.
Hardly a sale needed to be made when Kashmira mingled with our guests at a lunch I hosted, and Brad presented an overview of the project. The only special request I received was for photographs with our movie star. I was so relieved that we didn't have to go down the path of dealing with venture capitalists and were able to keep working with friendly investors. Now that's a true Hollywood happy ending to act one.
Wadhwa has co-founded two technology companies and is now chairman of Relativity Technologies in Raleigh, N.C. When not producing movies or battling venture capitalists, Wadhwa mentors fledgling entrepreneurs
Edited by Alex Salkever